Keys to Successful Multiple Practice Ownership
Published on
- 07-18-2024
Read Time
- 6 minutes read
Keys to Successful Multiple Practice Ownership
Start with the End in Mind
When beginning your journey toward owning more than one practice, we find it best to start with the end in mind. Identify your long-term goals for this type of business model. Most buyers interested in multi-practice ownership say they are looking to acquire 5-20 practices over a certain period of time, which they hope to resell the group of practices at a premium. Other practitioners are looking to make additional income over their career by having associates work for them, and some are looking to phase out of clinical dentistry or pursue other goals.
Selling to an Investor
If the goal is to resell to an inventory group at a premium, we find it helpful to know what investors are paying and what they are looking for in a group of practices. Many well-known DSO’s are open to buying a group of practices for 60-100% of last year’s collections or 150-200% of adjusted earnings. However, investors are often willing to pay a “multiple” anywhere from 5-10 times EBIDTA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
Before you get too excited, an investor is only willing to entertain practices with a minimum annual EBITDA of $250k, though over $300k is more ideal. To resell your group of practices to an investor buyer, all of the practices will need to have an EBITDA over $250k, respectively. Additionally, they are going to want a minimum of a 5-year work-back by the seller at an associate-rate of compensation, and will likely withhold 20% of the sale of the practice to be paid after the work-back period, contingent on the practice meeting certain fiscal benchmarks during the hold-back period.
To calculate your EBITDA, first calculate your adjusted earnings for the year. This is the total profit after paying all operating expenses (you will include staff wages and all discretionary expenses in the adjusted earnings number). Then calculate what you would pay an associate to replace you and subtract that amount from your adjusted earnings number. Here is an example: if I have a practice with gross, yearly collections of $1,200,000 and overhead of 60%, adjusted earnings would be $480,000 (or 40% of $1.2 Million). If the percentage of gross revenues attributable to hygiene is 20%, doctor wages would be calculated on the remaining 80% or $960,000. If the going rate of compensation for an associate dentist in the area is 30% of clinical production, doctors’ wages would equal $288,000. So, after subtracting operating overhead and fair-market doctor’s compensation, the EBITDA is $192,000. Based on the numbers, even though this is a healthy practice and would be attractive to a wide array of prospective buyers, savvy investment buyers may not be interested due to the EBITDA. Or, if they are interested, they may not be willing to pay more for this practice than any other private-party purchaser would be.
Having a Longer-Term Associate
If the goal of having multiple offices is to provide an added source of income, we find it best to establish a plan at the onset to attract, hire, and retain good associates. Turn-over with associates is one of the most challenging aspects of owning multiple locations. You may have to offer a high-performing associate some form of profit sharing or equity ownership in order to retain them long-term. Additionally, as you increase in size, we recommend hiring a business manager to assist in managing your growing team. This person can help implement systems while you run the business remotely. When you are ready to resell, you are likely looking at a DSO or independent buyer, unless your EBITDA is high enough in all of the offices to catch the interest of an investor buyer, as discussed above. Many DSO’s will still require a seller and/or associate dentists to continue to work in the practices after a purchase, so make sure to plan for an additional 3 to 5 years of clinical work after you sell.
How to Prepare for the Purchase of an Additional Practice
Before you consider adding another location, it is imperative that you evaluate the performance of your primary office. Each time you purchase another practice, make sure you are assessing the health level of your existing business. First, have clean financial records and keep separate records for each office location. This means avoiding rolling personal expenses into your business and co-mingling expenses between offices. Make sure your primary office has positive cash flow above your needs. Evaluate office systems and protocols to ensure they are effective and easy to sustain. Get pre-qualified for lending options or save enough cash to purchase the next practice. If you need to hire an associate, make sure they are hired, trained, and integrated into your business before moving on to acquire a new location.
When preparing for the purchase of multiple offices, acquire as much knowledge and experience as possible. We recommend taking as many practice management courses and workshops as possible. We also recommend hiring a great team to help advise you through the process; a consultant, an attorney, a CPA, and a bookkeeper, etc. Read books on business leadership and management. You need to become an expert on running an effective dental practice and managing people!
Finding the Right Practice Opportunity
As you begin your search for a second location, it is important to identify characteristics in a practice that are ideal for your business model. Once you have your list of requirements, remember to be flexible as you may never find the perfect practice and therefore may have to take a practice that is close and make it into the perfect practice. When you do find an ideal opportunity, remember most buyers—including DSO’s—are looking for similar opportunities. Also remember, not all sellers are open to transitioning their practice to someone who will eventually have an associate assume the care of patients. Some are only interested in selling to another dentist who will be working the practice as their sole practice. For this reason, you will need to be patient with the process and consider opportunities for growth that may not match your initial business model. Consider practices that are smaller and could be relocated, or practices that are lower in volume but are in a market with a healthy dentist-to-population ratio and could easily grow.
When you find an ideal opportunity, take into consideration the seller’s transition plan. For a second office, the most ideal scenario is a seller who is willing to work back and allow you time to plan a transition with an associate. This is not common, though. If a seller wants to exit after closing, you need to prepare for how you or your associate will take over the new office schedule.
How to Maintain a Successful Business
One of the first issues many multi-practice owners face is a lack of loyalty from staff. It is challenging to make a connection with individuals you only see or work with once or twice a month. Building trust and loyalty with your staff is the key to smooth systems and lower stress. Do not overlook the small things like OSHA, HIPAA, and practice management training. Ongoing training and CE take time out of the schedule, but it can save you from major misunderstandings. “An ounce of prevention is worth a pound of cure.” Staying organized with systems will foster a loyal team to help you improve business management as well as dental systems. As noted above, keep your finances clean and separate for all offices. Finally, continue to improve your communication, leadership, and business ownership skills throughout your career.
Our hope is that you will take extra time to thoroughly plan the growth of your business. Start with your end goal in mind and make each step strategic so you can manage the risk associated with multiple practice ownership and enjoy the process!